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Wednesday, 7 December 1983
Page: 3395


Dr BLEWETT (Minister for Health)(4.37) —I move:

That the Bill be now read a second time.

This Bill gives effect to the Government's proposal, announced by the Treasurer (Mr Keating) in the Budget Speech, to reintroduce a test that will take account of both income and assets for the purposes of assessing entitlement to pension. The test will replace the current test which takes into account only income, including income from assets. It will apply to social security pensions including age, invalid, wives', widows' and spouse carers' pensions, sheltered employment and rehabilitation allowances and supporting parent benefits, as well as to repatriation service pensions. One of the Government's major commitments in the welfare field is to increase the single pension to 25 per cent of average weekly earnings. Because the introduction of the income and assets test will direct welfare spending to the more needy, the prospects for the Government to honour this commitment will be significantly improved.

The decision in 1976 to introduce a test based only on income was short-sighted . The income test has substantially failed to concentrate assistance on those most in need. Some people have entered into arrangements designed to exploit the income test. Others have deposited large sums in non-interest bearing accounts, often disadvantaging themselves overall, in order to maximise their pension entitlement. No responsible Government can stand by while these sorts of practices persist, since they divert limited welfare funds from the most needy. The Government believes that the only way to redress this situation is to reintroduce a test which looks not only at the income of pensioners, but also their assets. In this way, we will not be paying people who have adequate private funds and who do not need income support.

I would like to make three basic points concerning the design of the new test. First, the test will maintain the position of the great majority of pensioners with only modest levels of income and assets. It is estimated that three- quarters of all pensioners will be unaffected and, of the remainder, about one- third are expected to gain. Most pensioners therefore have nothing to fear from the introduction of the test. Some pensioners will benefit from the new test because only 10 per cent of the value of a pensioner's property will be treated as income and the actual income from that property will be disregarded. For example, a pensioner who currently derives income from Aussie Bonds at a rate of 11.75 per cent per annum will be better off under the income and assets test. Second, the new test will catch those people with sizable amounts of assets who are circumventing existing rules. On the grounds of equity, such people have no right to scarce welfare funds. Third, the test is intended not to intrude upon pensioners or to require valuers to visit a pensioner's home. For this reason, the pensioner's home, car and personal effects will generally be disregarded in applying the new test.

The new test will, in general, follow the means test which applied prior to November 1976. However, it will in some respects be substantially more generous. Under the new lifestyle package, the first $30,000 of a pensioner's recreational assets, such as a holiday home or a bush block on which the pensioner is living, will be disregarded. No such exemption was available under the previous means test. Farmers will also be treated more generously. Under the old means test, they were hit hard because both their assets and income were taken into account. The new test will have regard only to either 10 per cent of the value of the farm's assets, or the actual net income from the farm if that is greater. In addition, many farmers will benefit from the lifestyle package. Additionally, the Government will substantially ease the rules which will apply to the payment of supplementary assistance by abolishing the special, stringent, means test that currently applies. This will materially redress the disadvantage experienced by private renters in comparison with home owners.

How the Test Will Work

Most pensioners own some property and also receive or derive some income. Under current arrangements, any income of the pensioner is taken into account. This may include income from the pensioner's assets, such as rent from a house, dividends from shares or interest from a bank account. The new test will basically operate in three steps. First, a value will be placed on the relevant assets of a pensioner. These assets will not, of course, include items of exempt property such as the pensioner's home, car and personal effects, and the first $ 30,000 of assets included in the lifestyle package. A uniform 10 per cent of the value of the relevant assets, excluding the general asset exemption of $2,500 combined for a married couple and $1,500 for a single pensioner, will be taken into account regardless of the level of income that they may actually produce. The amount is referred to in the Bill as the property component. Second, the income of the pensioner will be determined. This will include income such as personal earnings or wages but not income from assets already counted in the property component. Any income from exempt assets will also be included, subject to a maximum amount of 10 per cent of the value of the exempt property. For example, if a pensioner rents out his or her house while on a six months' overseas holiday, the house will be treated as an exempt asset but net rental from the house, up to 10 per cent of the value of the house, will be included as income of the person. Third, the income of the pensioner will be added to the property component and the total so calculated, after allowing for the free area of $1,560 per annum for a single person or $2,600 per annum combined for a married couple, will affect the pension in the same way as income does under the current income test, that is, each $1 in excess of these limits will reduce the pension by 50c. I will now outline in some detail the treatment of assets and income.

Assets

As I have mentioned, certain assets will be disregarded in calculating the property component of a person, regardless of their actual value. The most important exemptions are as follows: The principal home of the pensioner; a car for the private and domestic use of each pensioner; furniture and other household effects; clothing; tools, jewellery and hobby collections, provided they are for the private and domestic use of the pensioner; and other assets to the value of $1,500 for a single person or $2,500 for a married couple. The Government has also devised a lifestyle package which will exempt the first $30, 000 of the combined value of the following assets, provided they are maintained primarily for the recreational use of the person: A holiday home, being a permanent structure that is able to be used as a permanent residence and is actually used by the pensioner for at least two weeks of every year; a time sharing interest in a permanent structure that is used by the pensioner for at least two weeks of every year; a caravan; a motor vehicle with sleeping facilities; and a boat, and any accessories to that boat. The lifestyle exemption will also apply to a farm property, bush block or hobby farm on which a pensioner lives. This is in addition to the pensioner's principal residence and a small area of associated land which would be fully exempt anyway.

If any asset included in the lifestyle package produces income or is used by the person to produce income, the $30,000 exemption will be reduced by $10 for each $1 of that income. This ensures that the full exemption applies only where the asset is solely for the pensioner's private use. Where income from such assets exceeds $3,000 a year or 10 per cent of the value of the exemption, whichever is the lesser, the concession will not apply and the net value of the assets will be taken into account. Other exemptions will also be available in situations where it would be unfair or unreasonable to take into account the value of certain assets. Where a pensioner sells his or her principal home and intends to use the proceeds to buy a new one, those proceeds will be disregarded for a period of 12 months provided the proceeds are not attracting income. This is to ensure that pensioners undertaking normal transactions are not unreasonably penalised where, for example, the settlement of a house purchase is a few weeks after the settlement of a home sale.

Another important exemption will apply to pensioners who loan or pay money to acquire permanent accommodation at an aged persons home or a retirement village. Such a payment will not affect pension entitlement unless the pensioner pays or donates more that is required, in which case the excess amount would generally be treated as an asset. If the pensioner retained his or her former residence, it would no longer be disregarded as the principal home, however. If a pensioner enters a nursing home the pensioner's former home will continue to be disregarded for 12 months to allow the pensioner time to rearrange his or her affairs. However, if the home is rented out during this period, the net income will be taken into account.

As I have already mentioned, the lifestyle package may apply to farmers who live on their farms. Even where the package is not applicable, the treatment of farmers will be far more equitable than under the stringent conditions of the 1976 means test, where both 10 per cent of the value of farm assets and the net income from the farm were included in the pension assessment. Under the new test , where the annual rate of income from the farm is less than 10 per cent of the value of the farm assets, only the value of those assets will be taken into account. For example, if a farm valued at $100,000 produces income of $9,000 a year, only 10 per cent of the value of the farm assets will be taken into account but not the income. On the other hand, if the annual rate of income is more than 10 per cent of the value of the farm assets, only the income from the farm will be considered. Accordingly, if the farm valued at $100,000 produced income of $13,000, only the income would be taken into account but not the value of the farm. Similarly, in the case of a pensioner running a business, 10 per cent of the value of the business assets will be taken into account or, if the annual rate of income is greater than 10 per cent of that value, the actual income will be included, but not both.

Income

I will now outline the treatment of income under the new test. In general terms , the definition of income will include all income other than income which is derived from the pensioner's property. Current exemptions from the definition of income will, of course, be retained. Income will include any payment of a superannuation pension or an annuity, other than a purchased annuity, which are made to a pensioner. In the case of a purchased annuity, 10 per cent of the capitalised value of the annuity will be taken into account in lieu of actual payments. However, where it is to the advantage of the pensioner, the payments will be taken into account as income.

Supplementary Assistance

I now turn to the relaxation of the rules relating to the payment of supplementary assistance for private renters. Currently, supplementary assistance is income tested separately from the pension. A stringent test currently applies to such assistance, reducing it by 50c for each $1 of private income. The maximum assistance of $10 a week is therefore entirely lost when a pensioner's income reaches $20 a week. This test considerably disadvantages private renters by comparison with home owners, and the Government has decided to abolish the separate test for supplementary rental assistance. Under the income and assets test, supplementary assistance will be added to the pension and the general income and assets test applied to the total amount. At present, the pensioner must be paying rent of over $10 a week to qualify for any rental supplement and be paying rent of $30 a week or more to receive the maximum amount of $10 a week.

Deprivation

The new test will include provisions which will ensure the test is not circumvented by pensioners depriving themselves of income or assets. Similar provisions apply in the current income test, but they have failed to operate effectively. Under the new test, if a person disposes of income or assets without receiving adequate consideration, the deprivation provision will apply. However, to allow for modest gifts, such as to relatives or charities, pensioners will be permitted to dispose of assets to the value of $1,500 if single or $2,500 combined for a married couple in each year without affecting pension entitlement. Where a pensioner disposes of assets over these limits without adequate return, the difference between the actual return received and the current market value at the time of disposition will be treated as an asset. This amount will be reduced by 10 per cent on each anniversary of the deprivation. Where a pensioner forgoes or surrenders income without adequate return, the pensioner will be regarded as still receiving the income. For example, a person who forgoes an increase in superannuation will be regarded as receiving that income. Of course, the new deprivation provisions are not directed at pensioners who incur normal expenditure, such as spending money on home improvements or holidays. As announced by the Minister for Social Security (Senator Grimes) in his ministerial statement released on Budget night, any deprivations which occurred on or after 24 August 1983 will be affected by the new test. Regard will be had to any disposal of income or assets for up to five years before a person becomes eligible for a pension, but not before 24 August 1983. Where a person could not have foreseen that he or she would be claiming a pension, for example where a woman's husband dies suddenly and she becomes eligible for widow's pension, no regard would be had to income or assets disposed of prior to qualification for pension.

Appeal Rights

The comprehensive and well-established appeals system for social security pensioners will apply to the new test. Social security pensioners have the right to decisions which affect them reconsidered by a Department of Social Security review officer. If such a review is unsuccessful, a pensioner can seek further internal review by the Social Security Appeals Tribunal. An additional right of appeal exists to the Administrative Appeals Tribunal. The repatriation legislation does not provide for rights of appeal on service pension matters apart from the right of review by the Repatriation Review Tribunal on the question of permanent unemployability. This Bill does not contain any provisions which would extend the appeal rights or rights of review, although it is obvious that there are areas where such rights need to be available. The Administrative Review Council has been examining the question of the review of pension decisions under repatriation legislation and recently submitted a report to the Attorney-General (Senator Gareth Evans), which was tabled on 17 November 1983. The Government is considering the report and will determine what appeal rights or rights of review are to be made available. These will be available before the legislation for the income and assets test comes into operation.

Implementation

It is expected that the new arrangements will take up to 12 months from now to implement. The new test will, of course, have major administrative ramifications for both the Departments of Social Security and the Department of Veterans' Affairs, including:

The collection of data on the asset holdings of some 2.4 million current pensioners;

the development of new systems, clerical procedures, and computer programs;

the recruitment and training of staff;

the location of suitable accommodation and facilities; and

the dissemination of information about the test.

Administrative costs associated with the implementation of the income and assets test have been revised in the light of more detailed examination of staffing requirements and the timing of preparatory work necessary to achieve implementation by the target date.

Implementation costs to November 1984 are now estimated to be of the order of $ 80m. Of this, some $48m is expected to fall in 1983-84. These costs include not only those of the Department of Social Security and the Department of Veterans' Affairs but also those of other departments such as the Department of Administrative Services and the Department of Housing and Construction, which will incur quite substantial expenditures in connection with the provision and fit-out of accommodation. Additional costs for administration of the test once implementation is completed are estimated to be of the order of $15m per annum.

Impact on Pension Outlays

It is difficult to estimate the overall effect of the new test on outlays owing to the lack of data on pensioners' asset holdings. Using as a basis the impact of the change to the income test in November 1976, it is estimated that social security outlays could be reduced by $200m in a full year. The equivalent figure in respect of service pensions has been estimated by the Department of Veterans' Affairs at up to $110m. These estimates need to be treated with caution because of several factors, the impact of which cannot be readily assessed. On the one hand, the new test incorporates several exemptions not in the previous means test and there is now a different relationship between prevailing interest rates and the assets test conversion factor of 10 per cent. Both these influences would tend to reduce savings. On the other hand, savings will be higher to the extent that the introduction of the present income test increased circumvention of the financial criteria of pension eligibility. No estimate can be made of the possible higher savings resulting from this factor. In addition, of course, the size and distribution of pensioners' asset holdings are likely to have changed since November 1976.

The argument for an income and assets test is not about whether we should have a means test at all. Governments of all persuasions have accepted this principle . It is about which type of means test is most effective and most equitable. The Government considers that the proposed income and assets test will be far superior to the current income test in both respects and will therefore allow a considerable redirection of scarce welfare funding to the more needy in our community. I commend the Bill to the House.

Debate (on motion by Mr Carlton) adjourned.